• 3Q19 revenue and PATMI exceeded our estimates by 4% and 7% respectively.
• NII supported by 4bps YoY NIM expansion to 1.90% as loans were repriced with higher interest rates in Singapore and Hong Kong. Loans growth softer at 4% YoY.
• Fee income at a record high of $814mn. Strong trading income growth of 22% to $431mn due to higher gains in interest rate activities.
• CIR% well contained, improving 2p.p. from a year ago to 42%.
• Declared a quarterly dividend of 30 cents per share. We forecast 2019 dividend of $1.20/share.
• Maintain ACCUMULATE at a lower target price of S$27.30 (previous TP: S$27.60). Our TP is based on target price-to-book of 1.4x, derived from the Gordon Growth model (long term ROE assumption: 12.4%, COE: 9.3% (Beta: 1.2x), Growth: 2.0%).

The Positives

+ NIM held up at 1.90%. NIM expanded 4bps YoY as assets yield rose 14bps YoY (due to stronger hold up of SIBOR and HIBOR, and push-through of loan repricing), outpacing the rise in funding costs of 10bps YoY. NIM contracted 1bps QoQ, reflecting the lower interest rate environment. In view of three rate cuts, DBS expects a softer 4Q NIM with full-year NIM be below guidance and may come in at 1.88% instead of previously expected 1.90%. DBS guided NIM to decline by around 7bps in FY20 from FY19 average NIM. We maintain our FY19e NIM at 1.89% and lower our FY20e NIM forecast by 7bps to 1.82%.

+ Fee income at a record high of $814mn due to wealth management, card fees and investment banking fees. AUM rose 9% YoY to S$241bn as DBS continues to attract net new money inflows from mid-to-ultra high net worth individuals, as well as from the region. The consistent momentum in the wealth management segment will support a more stable income base.

+ CIR well contained, improving 2p.p. from a year ago to 42%. Positive JAWS resulted in improvement in CIR with well-managed expenses. DBS expects CIR to be weaker in FY20 and a negative JAWS to be likely next year due to low-single-digit income growth expectations while the Group continues to invest in technology and manpower.

The Negatives

– Allowances rose 8% YoY. Additional general allowances of $61mn taken as a prudent measure given the ongoing political and economic uncertainty. General provisions stood at $2.9bn, of which expected credit loss reserves made up $2.6bn. DBS is at the prudent end of its provisioning policy with a substantial overlay to cushion the portfolio. NPL ratio unchanged at 1.5% while specific allowances of $197mn were 21bps of loans for 3Q19, in line with recent quarters’ levels.

– Loans growth soft at 4% YoY. Overall loans growth was stable on quarter as growth in non-trade corporate loans and non-housing consumer loans offset by declines in trade loans and housing loans. DBS guided FY20e loans growth to have a similar pace as FY19e’s 4% YoY.

Investment Actions

Maintain ACCUMULATE at a lower target price of S$27.30 (previous TP: S$27.60). Our TP is based on target price-to-book of 1.4x, derived from the Gordon Growth model (long term ROE assumption: 12.4%, COE: 9.3% (Beta: 1.2x), Growth: 2.0%).

Dividend yield support. We forecast FY20 DPS of $1.20, giving a 4.5% dividend yield support.

Total income increased 13% to a new high of SGD S$3.82bn from loans growth of 4% YoY, record fee income (+17% YoY) and higher trading gains (+22% YoY).

Wealth management fees rose 22% to $357mn from higher investment product sales. Card fees grew 9% to $202mn from increased transactions across the region. Investment banking fees more than doubled to $55mn as equity and debt capital market activities increased. Transaction service fees grew 7% to $190mn as both cash management and trade finance fees were higher.

Other non-interest income grew 35% to $549mn. Trading income increased 22% to $431mn from higher gains in interest rate activities. Net gain on investment securities doubled to $105mn.

Gross customer loans rose 4% from a year ago in constant-currency terms to $358 billion. The growth over the 12 months was driven by corporate non-trade loans from broad-based activities across the region.